Frustration... or is it?

Fresh from the vexing question of force majeure application in the context of the COVID-19 pandemic, businesses are now grappling with the equally vexing question of whether the newly imposed global sanctions regime will result in contracts being frustrated (and discharged) due to impossibility to perform on the grounds of illegality. 

The frustration doctrine is embedded in common law, and the benchmark is high with courts historically tending towards a reluctance to apply it. Because a successful application of the doctrine results in the release of both parties from their contractual obligations – think no-fault divorce – it has seemed nothing short of quite literal impossibility will do. Where a work around is possible, that is expected. But that will not always be the situation, such as the case of the illness of an opera singer which prevented her appearance, and that is where frustration steps in. It may also not be the case where the problem is illegality.

In cases of illegality frustration, additional public policy considerations come into play. Inevitably this is likely to include public policy against circumventions of sanctions that defeat or dilute their purpose.

Historic cases stand as warnings against the risk of calling frustration too early, alongside the need to fully stress test that impossibility test.

Businesses grappling with this issue should start with the sanctions themselves and their contracts. Beginning with the question of whether performance would be in breach of a sanction as a matter of fact and law, and whether the contract can be said to have apportioned the risk of that already, on its proper construction. Following with considerations of whether that performance need happen right now or whether there is time to pause to see how developments unfold – whether time is of the essence in the contract. In the 1916 case Millar Limited v Taylor for instance, an export contract was held not frustrated by an embargo against exports during WW1 because on the facts the embargo was lifted before the end of the normal delivery period. Interestingly, that case distinguished an embargo imposed by the act of an executive government from a state of war, the duration of which was impossible to know.

If performance is imminently due, the inevitable next question will be whether it is possible to seek licence to continue, as it may well be the case that only an attempt and failure to get that licence will be enough to reach the high threshold required for frustration.

If the courts are asked to look at this issue in cases arising from the current sanctions regime it will be interesting to see whether the law will shift towards the more pragmatic solution of temporary suspension of contracts (like with force majeure) as opposed to full discharge – albeit, that will take time and does not afford an answer now. 

We will be monitoring the position as the situation unfolds.